Robin Smeaton looks at the emergence of Social Investment Tax Relief (SITR) and asks if those promoting such funds are prepared helping good causes

Human goodwill and investing in our social infrastructure has been around for generations. What is new on the social investment block is the introduction of Social Investment Tax Relief (SITR), which could have a more significant and direct impact on the economic and social landscape of Britain.

Tax incentives might appear an anathema to low-income earners, but the reality is they help encourage individuals and corporate investors to put at least some of their money into projects offering the chance of a steady return.

The big question is, does the community of independent financial advisers – who will be promoting these social funds – really know enough about the implications? And are they likely to steer sophisticated investors, bitten by the bug for existing schemes such as tax-efficient venture capital trusts (VCTs) and enterprise investment schemes (EIS), to take a leap into investments designed to make a positive impact on the world?

So far, only a dozen or so SITR schemes have had clearance. “It’s not a surprise that there have been so few investments so far, but I anticipate a lot more when the charities and independent financial advisers begin to understand how they can benefit from well-run social investment projects,” says Neil Pearson, an expert in social finance who has worked for the not-for-profit organisation Social Finance.

the major issue now is what kind of resources exist to assist IFAs to recommend the social investment tax relief

Robin Smeaton

The consensus in the fledgling social investment sector was that tax incentives was the best way to fuel investors’ interest. While the SITR scheme was given the go-ahead in July 2014, little was done in earnest until last September and the first projects were launched during January and February of this year.

Investors will pay no tax on dividends received from a social VCT or capital gains tax on disposal of shares in social VCTs. So with the potential for bigger investments under SITR, and a wider variety of SITR funds, the major issue now is what kind of resources exist to assist IFAs to recommend the social investment tax relief. And will they be able to give proper advice on whether a social investment is a worthwhile opportunity or simply a dead-duck.

The first social investment tax relief project is in Bristol with the charity FareShare South West, which is tackling food waste and handing surplus food to vulnerable people. It was set up by impact investment company Resonance and received an investment of £70,000 from a group of angel investors piloting the new tax rules.

Grace Howells, who was an investment analyst with Resonance said: “The project has been a great success. It was crucial for FairShare to have access to capital that they could afford. With no capital repayments in the first three years, they will be able to scale up and concentrate on what they do best, rather than spend time on grant-funding applications.”

As receiving agents for VCTs, City Partnership has been offering some administrative advice to Social Investment Scotland, based in Edinburgh, who launched its first £500,000 fund in May.

“We’ve spoken to a number of wealth managers and IFAs. They are not directly promoting our fund as such, but instead are taking a softer approach to try and identify a handful of investors who they feel will be interested in investing in this kind of fund,” says Thomas Gillan, chief financial officer of SIS.

“Certainly it is difficult for IFAs, from a regulatory stance, to get involved in what they might view as a small product in a niche market. However, saying this, the doors do open and people are receptive because they know it for good causes in an emerging space.”

There is no doubt IFAs are more comfortable with larger scale products, and social investment funds will have to win their spurs to attract a wider fan-base of willing investors. Given time, however, ethically-minded investors are likely to play their part in a big way.

Robin Smeaton is the managing director of the City Partnership, based in Edinburgh and London, who act as receiving agents for many of the UK’s VCT plcs.